Accounting and Interpreting Financial Statements - Unilever International Plc - Assignment Example

Accounting and Interpreting Financial Statements – Unilever International Plc Unilever International Plc: Unilever Group is a merger between a British soap manufacturer Lever Brothers and another company called Uni. The result was the huge FMCG and consumer product giant named Unilever. The Unilever Group itself operates under a dual structure. Unilever NV and Unilever Plc are twin components of the Unilever Group. Both of these companies have separate legal entities and are traded separately on the stock exchange as well. The operations of the group are predominant in Europe, Asia and Africa and America with headquarters in the United Kingdom. “The group recorded revenues of E39, 672 million during the fiscal year ended December 2005, an increase of 2.9% over 2004. The operating profit of the group was E5, 314 million during fiscal year 2005, an increase of 25.4% over 2004. The net profit was E3, 975 million in fiscal year 2005, an increase of 35.2% over 2004.” (Datamonitor, 2006) The mission of the company is to bring energy and motivation to life. The company declares its mission statement as “Unilever's mission is to add vitality to life. We meet everyday needs for nutrition, hygiene, and personal-care with brands that help people feel good, look good and get more out of life.” (Unilever Plc, Official Website) The Unilever Plc with its 206,000employees ranked at number 81 in 2005 and 106 in 2006 according to Fortune 500’s rankings. The source also dictated the companies revenues at $49,580 million of which profits were $4,680 Million. This has lead to stockholder’s equity of $9,960 million of the company. Amongst the food consumer products category Unilever Plc ranks second after the Nestlé Corporation (Global Fortune 500, 2006). Strengths, Weakness, Opportunities and Threats for Unilever International Plc (SWOT): Strengths: Unilever it self is a market leader with an extensive portfolio of brands existing and operating in more than 150 countries. The main operations and key brands for Unilever have been able to establish themselves with an identity of their own. E.g. the Knorr brand which heads the soups, noodles and sauces category in the foods and consumer sector. The company has also been able to identify itself as a leading ice-cream manufacturer and provider with Magnum, Cornetto and Max form its Walls line of ice cream products Bertolli, Unilever Plc brand of olives is the market leader in Europe. The company also has a strong presence in the personal care industry wit big names like Axe, Dove, Ponds, Lux and Sunsilk under its corporate umbrella. The company itself has been able to create a position for itself by establishing its roots in the remerging economies of India, Pakistan, Middle East, Africa and Latin America. Unilever has been able to perform this task by customizing its global range of products to suit the consumers in the targeted consumer market The company strives to be innovative in its product offering and for this conducts extensive in-depth consumer research The company has also changed its research and development strategy. Unilever Plc now does not conduct a centralized research anymore. The company now invests in decentralized and customized research for its various markets “Unilever emphasizes innovation not only in its products, but also in its processes. For example, in 2004, a Unilever distribution centre in Coventry, UK, drove refrigeration cost savings of about 40% through the installation of technologically advanced insulation and energy re-use facilities.” (Datamonitor, 2006) Weaknesses: Despite the investment and innovations being carried out by the company in its various markets, the company is loosing its market share. The company has been reporting declining revenues since 2002 which is increasing rapidly with a 6 percent in revenue reported in 2004 compared to 2003. Another problem faced by the company is that due to extensive product development and brand proliferation in the market, the companies brands have started saturating the market with the result being that the key brands for the company are eating up each other’s market shares and competing with each other. This has resulted in an unhealthy competition which is effecting the company adversely. The company also faces stiff competition from its counterparts like P&G and Nestle P&G and Nestle have built their product base and their brands around the company’s corporate name; however the Unilever brands are different and not associated with the company’s corporate identity. Unilever’s weight-loss product, Slim-fast was a failure as it contained high levels of carbohydrates which in consumer’s opinion are not healthy for people on a diet to lose weight. The company was unable to achieve its goals set out in 1999 in the form of ‘Path to Growth’ which ended in 2004. the failure to achieve these targets has fostered lack of confidence in the shareholders for the company. Opportunities: The market for healthy, organic and nutritional foods is increasing due to the increase in the awareness for health in the minds of the consumer Nestle has already started deploying marketing campaigns and products aimed at this niche and Unilever has an opportunity of diversifying in this sector as well as there is immense room for growth here. The company’s strong base of brand names can help the company gain the trust of the consumers in the market, when diversifying into a new product or category. In 2004 Unilever underwent a corporate restructuring by which the company plans on separating its brand development and category development from the customer development divisions. This was an attempt to respond to the declining growth registered in 2004 and aims to focus on acquiring new customers and strategy building rather than simply handling mature brands and retaining customers. As already mentioned the company has been able to achieve growth in emerging economies in both developed as well as developing regions around the world. This has opened a new market for the company which is increasing and has a large population base for the targeted consumers of the company. This is an opportunity for the company as the growth in the developed markets in Europe and America is due to get stagnant with the saturations of brands available in the market for the consumers. Threats: The key market for Unilever Plc has been the European market but this has increasingly become saturated with products. The globalisation phenomena shown by the retail stores in Europe specifically related to Marks and Spencer, ALDI, Wal-Mart and Carrefour has managed to take the market share from the company as these retailers provide their own brand of products specifically aimed at different segments of the market at much lower prices. With the increase in inflation throughout the world and the increasing cost of living in the region has made the consumers more price conscious as a result they are going for the much cheaper and ‘value for money’ retailer owned products. The FDA announced in 2003 that all products with trans-fatty acids have to state their proportionate ingredients in their labels. This law is to be enforced from 2006 and is going to impact the packaging division for Unilever Plc. The FDA regulation can also result in consumer withdrawal from Unilever products with high fat content as they want to opt for a healthier lifestyle. Unilever Corporate Governance: The Unilever Plc collaborates with the Unilever NV to formulate and establish its corporate governance which is presented under the name of Unilever Group. The company follows the codes of practice dictated in all the regions of their operations however the most crucial ones include the best practices for Netherlands, UK and the US. The fundamentals of the Governance for Unilever include: 1. The dual structure of the company in form of twin operations of NV and Plc under the Unilever Group 2. Foundation Agreements for Equalization, Deed of Mutual Covenants, Agreement of Borrowing, Memorandum of Articles and the governance itself. 3. Unity of Management: This includes the goal and strategy orientation for both companies relative for the main entity. 4. Unity of Operations: This includes synergy in innovation and development in the operations for both companies relative for the main entity. 5. Unity of Shareholders Rights: This includes providing the same benefits to the shareholders for both companies. The Board business as dictated by the governance declares the board to have responsibilities regarding Strategy formulation and direction of the group Developing and implementing an annual plan nd a framework of operations with quarterly developed performance reports Nominations and remuneration policies for key executives and directors The management and relationship development for the shareholders of the company Developing the financial policy and the dividend policy for the group The board approves the capital expenditure for any project stated in the annual plan or above the 250 million euro mark The board also approves any settlement and claims for up to the 100 million euro value The board is responsible for the financial framework targets for the group Setting and implementing strategies for the finance and treasury operations of the group Other operations for the financial framework include: “Handling cost of hedging net investment exposures up to €60 million per annum” (Governance for Unilever, 2006) Developments in the Corporate Governance for Unilever: From 2004, the company has restructured itself and has started operating under the one-tier management which has one board of directors but many independent executives. In 2005 the structure of the company was evaluated and reviewed to determine the effects of the restructuring activity in 2004. It was determined that Unilever group would be operating with the same structure as proposed in 2004 for its operations. In 2006 further changes were proposed to the structures which were undertaken as well. These included: Adapting the constitutional arrangements to make way for more flexibility between the operations of the twin companies The relationship between the Unilever Plc and the Unilever NV was simplified by making them equal. This was done by splitting NV ordinary shares in a ratio of 3 is to 1 The shareholders are now allowed to nominate candidates for the board as long as the unity of management is kept established for both the companies. Unilever Operations and Financial Review (1996-2006): In accordance with the changes proposed by International Financial Reporting Standards (IFRS) in 2005, the Unilever Group adopted the new IFRS standards from January 2005. In the period from 1996 to 2006 the turnover for Unilever has in the overall decreased form $52,344 mill in 1996, to $43,954 mill in 1999, and then increased in 2001 to $46,740 mill. In 2007 under the IFRS it was reported to be $49,711 mill. Over the years, sales by geographical area have increased fluctuating with steep declines in 2000 and 2002 in the Europe region. In America as well, the trend was similar but with much steeper declines for more prolonged periods. In the Asia and Africa region the sales have steadily grown due to the developing nature of their economies since 1996. The total growth from 1996 to 2006 has been from 8.6 percent in 1996 to 13.6 percent in 2006 under the IFRS. The financial ratios show that the property, plant and equipment as percentage of turnover has gone from 23.7 percent in 1996 to 15.4 in 2006. The working capital as percentage of turnover has shown the trend of declining from 10.3 percent in 1996 to 2.8 percent in 2006. The return on invested capital ratio depicts an increase from a 9.7 percent in 1996 to a 14.6 percent in 2006. The cash flow for the companies operations has been shown an increase from the $ 5,932 mill in 1996 to the $ 6,990 mill in 2006. The un-geared cash flow has also increased from $ 2,616 mill in 1996 ton $ 5,294 mill in 2006 Equity and share ratios when compared for the records for 1996 and 2006 show an increase in the earnings per share from 0.57 in 1996 to 1.65 in 2006. The dividend per share has also been from 0.26 in 1996 to 0.70 in 2006. The share price for NV in Amsterdam has also increased from 11.56 in 1996 to 20.70 in 2006 with the dividend yield being 2.3 percent and 3.3 percent for 1996 and 2006 respectively. The Share price for Unilever Plc was stated at 14.28 pounds in the London stock exchange. Unilever in 2006-2007: The company Unilever Plc has attempted to brand itself, in a strategy similar to P&G and Nestle. The company has eliminated the Lever Faberge and has implemented a new logo in 2004 which is more globally appropriate. Also as a response to the failing growth in the developed markets the Unilever Plc sold its fragrance unity, Unilever Cosmetics international (UCI) to Coty Inc. for $800 million. The UCI included product licenses for brands such as Calvin Kline, Vera Wang, Chloe and Lagerfeld as well as manufacturing establishments As reported by the 2006 shareholders report the divisions and brands for Unilever Plc include Savory and Dressings, Ice Cream and Personal Care, Beverages, Spreads and Cooking, and Home Care etc. The personal care division includes brands like Axe, Pond's, Rexona, Dove, Lux and Sunsilk, Suave, Clear, Lifebuoy and Vaseline, together with Signal and Close Up. The savoury and dressing segment consistes of brands like Knorr, Hellmann's, Calve, Wishbone, Amora and Bertolli. Home care and other include brands like Omo, Surf, Radiant, Skip, Snuggle, Comfort, Cif and Domestos. The ice cream and frozen foods boast of brands such as Cornetto, Magnum, Carte d'Or, Solero, Ben & Jerry's, Breyers, Klondike, Popsicle, Iglo, Birds Eye and Findus. The spreads and cooking products segment includes branded Becel, Flora, Rama, Blue Band and Country Crock. The beverages segment includes mega brands like Brooke Bond, Lipton, as well as Slim-Fast, Annapurna and AdeS. The quarterly financial report for the last quarter of 2006 showed that sales increased by 4.8 percent but these effected by the increase in the expenditure for this period as well. Magnum and Cornetto launched new flavors and packaging and as a result the sales for the ice-cream division increased the overall growth for the company. The major of the expenditure reported in the income statement was for Dove, and Sunsilk and AdeZ. The overall operating profit decreased by 2 percent in this period and the net profit as a result was also decreased by 45 percent. The pre-tax profits also dropped by 20 percent. The company allotted dividends to its shareholders in an interim for one-off for 2006 at 33.28p per ordinary share, which had an ex dividend rate for interim at 15.62p and one-off at 17.66p. The Turnover for 2006 was at 15,000 mill euros compared to the 14,940 mill euros for 2005. The operating profit was at 1,903 mill euros compared to 2005’s 2,064 mill euros. This shows that the operating margin has decreased in 2006 from 13.8 percent in 2005 to 12.7 percent. The pension accounting and recording in Unilever Plc for UK in 2006 shows a discount rate applied of 5.1 percent with an inflation of 2.9 percent. The expected long-term rate of return on the Bonds was at 5.2 percent, for Equities was at 8.0 percent, for Property was at 6.5 percent and for other investment was put at 7.2 percent. The geared cash flow statement for 2006 showed a net profit of 5,015 mill euros with a tax allotment of 1,332 mill euros. The resultant cash flow from operating activities in 2006 was at 5,574 mill euros which was relatively less compared to the 5,924 mill euros for 2005. The un-geared free cash flow for 2005 was at 4,011 mill euros while for 2006 it was recorded at 4,222 mill euros. The average invested capital for 2006 was recorded at 36,850 mill euros, compared to the 37,012 mill euros for 2005. The ratio for the return on capital invested for 2005 was at 12.5 percent compared to 2006 where it increased to 14.6 percent. The EPS for 2006 from continuing operations was at 1.19, compared to 1.07 for 2005. The EPS total however was at 1.65 in 2006 which was an increase from the 1.29 in 2005 The balance sheet for 2006 showed goodwill set at 17,206 mill euros, Current Assets were at 9,501 mill euros, Current Liabilities were at 13,884 mill euros with Shareholders equity at 11,230 mill euros. This was in total a decrease from 2005 where goodwill was set at 18,055 mill euros; Current Assets were at 11,142 mill euros, Current Liabilities were at 15,394 mill euros with Shareholders equity at 8,361 mill euros. The Share price for Unilever Plc was stated at 14.28 pounds in the London stock exchange. As apparent from the evaluation of the company’s performance over the years and the trends of increasing share price and equity for the Unilever Plc, it can be said that using financial statements for company assessment is just one method of evaluating a company. In-depth analysis needs to be conducted top determine reasons for situations like the overall decrease in the company’s profitability and growth but the rapid increase in the share price and the equity for the company over the past years. Future for Unilever Plc: Currently Unilever is facing threats due to the declining trend of growth for the company in all developing markets which has not yet been set off by the growth in the Africa, Asia and Latin Americas region. The immediate threats facing the company as defined by the SWOT analysis include: Intense competition in the future in all markets, and for all the key divisions. This competition would be faced due to declining prices, increased cost of living and the rising demands being set by the trade partners of Unilever. Unilever has already lost the price advantage it had in the UK market to Reckitt and Benkiser, Proctor and Gamble and Nestle. These companies are right now offering much netter products with suit the consumers at a competitive price range. The consumers have gotten extremely health conscious and as a result the ice cream division will be facing a huge set back I the future if the product offering is not adjusted to meet the consumers demands. Nestle has already taken out the brand of Dreyers ice cream which is a low calorie less fat version of their ice cream. This has taken significant market share from Unilever. The market also has shown an increasing trend of eating out, this could jeopardize and effect Unilever’s frozen food and packaged food division as the focus right now seems to be drifting towards new dining concepts. This trend is mostly due to the increase in the divorce rate, the increase in the single parent families and working spouses has led to less time spent in the kitchen and at home. The currency fluctuations also effect Unilever’s operation due to the fact that the company operates in 100 plus countries. Unilever however can utilize its strengths to overcome the threats that the company is due to face in the future. These strategies could take the form of: Investing in the emerging markets of Africa, Asia and Latin America which are showing tremendous rates of economic growth. Men have started spending money and time on their appearances. Aside from this there has also been a recent trend in the increase in metro-sexual men in the market. This could be an opportunity for Unilever to invest in men’s toiletries and fragrance market. (Similar steps have been taken by P&G with the acquisition of Gillette) The increasing trend of eating out and the trend of eating healthy food by the consumers could be utilized to innovate ready to eat products in the frozen food division which are healthy but not time consuming and convenient for people with a busy schedule and lifestyle. Reference 1. Fortune Global 500, (2006), Unilever Profile available at: http://money.cnn.com/magazines/fortune/global500/2006/snapshots/1483.html 2. (2006), Governance of Unilever available at: http://unilever.com/Images/ir_Governance_of_Unilever_tcm13-85120.pdf 3. Unilever Charts - 1996-2006, available at: http://unilever.com/Images/ir_Charts%201996%202006_tcm13-90292.pdf 4. (2006), Unilever Group - Annual Report 2006, available at: http://unilever.com/Images/ir_06_annual_report_en_tcm13-88518.pdf 5. Datamonitor, (2006), SWOT Analysis– Unilever Plc, available at: http://web.ebscohost.com/bsi/pdf?vid=2&hid=104&sid=7d8eb217-46ba-4c35-9899-1130e486326e%40sessionmgr107 6. Datamonitor, (2006), Company profile – Unilever Plc, available at: http://web.ebscohost.com/bsi/pdf?vid=2&hid=9&sid=128690cd-7628-4480-9271-06aa926ede2f%40SRCSM2 7. (2006), Unilever Q3 Sales Up, Market Watch, available at: http://web.ebscohost.com/bsi/pdf?vid=2&hid=4&sid=c678b689-f748-496a-a645-6f910d48a7a1%40sessionmgr108 8. De Guzman, Doris, (2005), Unilever Sells Fragrance Biz to Coty, Chemical Market Reporter, available at: http://web.ebscohost.com/bsi/detail?vid=1&hid=104&sid=a3d5700b-db41-4ae8-bec9-72b2e772b71a%40sessionmgr104 Read More